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Edited Transcript of ALQA earnings conference call or presentation 9-Nov-17 1:00pm GMT

Q3 2017 Alliqua BioMedical Inc Earnings Call

YARDLEY Nov 20, 2017 (Thomson StreetEvents) -- Edited Transcript of Alliqua BioMedical Inc earnings conference call or presentation Thursday, November 9, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradford C. Barton

Alliqua BioMedical, Inc. - COO

* Brian M. Posner

Alliqua BioMedical, Inc. - CFO, Principal Accounting Officer, Treasurer and Secretary

* David Ian Johnson

Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc

* Pellegrino Pionati

Alliqua BioMedical, Inc. - Chief Strategy & Marketing Officer

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Conference Call Participants

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* Joshua Thomas Jennings

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Suraj Kalia

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Swayampakula Ramakanth

H.C. Wainwright & Co, LLC, Research Division - MD & Senior Healthcare Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Third Quarter of Fiscal Year 2017 Earnings Conference Call for Alliqua BioMedical Inc. (Operator Instructions) Please note that this conference call is being recorded and the recording will be available on the company’s website for replay shortly.

Before we begin, I’d like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our most recent annual report on Form 10-K filed with the SEC and our most recent 10-Q filings with the SEC. Such factors may be updated from time to time in our filings with the SEC, which are available, free of charge, on our website and the EDGAR database on the SEC’s website at sec.gov. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise.

This call will also include a discussion of several financial measures that are not calculated in accordance with the generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. The company has presented the following non-GAAP financial measures in this press release: non-GAAP net loss from continuing operations; adjusted EBITDA from continuing operations; and non-GAAP net loss from continuing operations per share. The company defines non-GAAP net loss from continuing operations as its reported net loss GAAP, excluding stock compensation expense, acquisition-related expenses, onetime charges and other nonrecurring operating costs and expenses, change in fair value of contingent consideration, change in value of warrant liability, impairment charges to goodwill and other intangibles and income from discontinued operations. The company defines adjusted EBITDA from continuing operations as non-GAAP net loss from continuing operations excluding income tax expense, interest expense, net and depreciation and amortization. Reconciliations to the most directly comparable GAAP financial measures can be found in the company’s earnings press release issued this afternoon.

Now I would like to turn the call over to Mr. Dave Johnson, the Company’s Chief Executive Officer. Please go ahead, sir.

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [2]

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Thank you, operator, and hi, everybody. Welcome to our third quarter of 2017 earnings call. I am joined in our Yardley office this morning by our Chief Financial Officer, Brian Posner; our Chief Strategy and Marketing Officer, Nino Pionati; and our Chief Operating Officer, Brad Barton, who will all be available to answer questions following our prepared remarks.

Before we begin, let me quickly outline the agenda for today's call. I'll start off by updating you at a high level of the progress we've made over the first 9 months of 2017. Brad and I will then discuss our commercial and operating progress during the third quarter. And then following these remarks, we'll turn the call over to Brian for a detailed review of our third quarter financial results and our 2017 guidance, which we updated in our press release this morning. And then I'll come back and just share a few closing remarks before we open the call up for questions. With that, let's get started.

Now 9 months into the year, we're excited to report that we have been successful in driving commercial progress in 2017 while making significant strides to improve our financial profile.

Year-to-date, we've grown our product revenue 28% year-over-year by executing on our targeted sales strategy for our regenerative products. This performance is even more impressive given the challenges that many companies have had in the third quarter due to the impact of the hurricanes.

In addition to our revenue performance, we improved our financial profile by improving our adjusted EBITDA loss by approximately 46% over the first 9 months of last year.

Further, our cash burn from operations of $1.8 million in the third quarter represents a decrease of approximately 50% compared to both the second quarter of 2017 and the third quarter of last year.

We have also made progress in our efforts to strengthen our balance sheet. We raised over $9 billion of gross proceeds during the first 9 months of the year through 2 offerings and the recent sale of our TheraBond product line. And separately, we announced via press release this morning that we have formally engaged Cowen to assist us in evaluating some strategic alternatives, which I will discuss later in my remarks.

Our performance on these 3 fronts have set the tone for 2017, and we intend to continue this progress as we close out the year.

With that, let me turn the call over to Brad for a review of our revenue results in the third quarter and the recent progress that we have made on our targeted sales and marketing strategy. Brad?

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Bradford C. Barton, Alliqua BioMedical, Inc. - COO [3]

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Thanks, Dave. For the third quarter of 2017, we grew our total revenue 12% year-over-year to $4.9 million. This total revenue performance in the quarter was driven by 14% growth in our products business. The growth in our products business during the quarter was due to continued strength in sales of our regenerative products.

With 70% growth year-over-year in our Biologics and contributions from strong UltraMIST System sales as well.

Our revenue performance was particularly impressive given the recent disruption from the hurricanes.

The Southeast region of the United States represents an important market for Alliqua.

During the third quarter, we did see an impact to our business primarily in Houston and in Florida as a result of these hurricanes. While it's difficult to quantify, we believe the impact was not material to our results and we are very pleased with the performance in the third quarter despite the business disruption in these regions.

Our third quarter revenue performance reflects the continued success of our targeted sales and marketing strategy to drive growth in our regenerative products.

As a reminder, this strategy consists of 3 primary elements. First, we have enhanced the focus of our selling organization on driving sales of regenerative products, Biovance, Interfyl and UltraMIST into key segments of the market where they are well positioned for growth. We began to see traction, in these market segments during 2016, and we then increased our focus accordingly in 2017.

Second, we have engaged with independent sales agencies to augment the efforts of our direct reps. Pursuing this more hybrid approach to the expansion of our selling organization is consistent with our goal to enhance the sales coverage of our target markets without increasing our fixed operating costs.

Lastly, we have focused our physician outreach efforts on initiatives that promote peer-to-peer engagement. Allowing our potential customers to learn from our physician users has proven instrumental in raising awareness of the benefits of our products.

As I will discuss further, these initiatives have also been very successful in helping us to convert new users.

As Dave mentioned earlier, we believe that the success of these 3-pronged sales and marketing strategy has been demonstrated by our products growth we've seen in the first 9 months of 2017.

During the third quarter, specifically, we continued to execute our strategy and solve direct evidence that is contributing to our revenue performance.

Beginning with our Biologic business, where we're focused on driving sales into the surgical segment of the market, I'm pleased to report that sales into this segment of the market drove the majority of the 70% year-over-year sales increase that we achieved during the quarter.

Our surgical sales growth also benefited from contributions from both our direct reps and our independent sales agents.

In terms of our physician outreach efforts, we hosted 2 Bioskills labs during the third quarter of 2017, which were both well-attended and well-received by our prospective surgeon customers.

Over the first 9 months of this year, we've hosted a total of 5 Bioskills labs across the country and, importantly, I'm excited to report to you that roughly 2/3 of the physicians that participated in our Bioskills labs have indeed adopted our Biologic products. This is a strong indication of how our Bioskills labs enhance our ability to increase our awareness of Biologic products, which helps to drive new Biologic customers.

Likewise in our UltraMIST business, we saw a strong year-over-year growth in the sales of UltraMIST Systems, which reflects promising trends in our new account growth.

Consistent with our expectations, our third quarter growth in UltraMIST System sales was fueled by strong sales into the hospital outpatient department or HOPD.

Recall that we have focused our selling organization on driving sales of UltraMIST in the HOPD, which represents our largest and most attractive segment.

Within the HOPD, they are driving adoption by leveraging our impressive portfolio of clinical support and demonstrating the system's efficacy in treating Venous Leg Ulcers.

Our UltraMIST System's growth was particularly strong in light of the fact that we had 2 unusually large orders of UltraMIST Systems that came in during the third quarter of last year, creating the potentially difficult year-over-year comparison this quarter.

Now from a marketing standpoint, we also continue to make progress on our UltraMIST physician programming.

During the third quarter, we hosted our second UltraMIST physician summit in Chicago. These physician summits are peer-to-peer educational events that are similar in concept to the Bioskills labs.

The physician summits are helping reduce evaluation times and we're seeing encouraging adoption rates from those who are attending.

We also hosted a new type of event in Fresno, California this quarter called an UltraMIST new user forum, which is an overwhelming success. This new user forum represents a different approach to the way we typically support and train our base of new customers.

Our UltraMIST new user forums are intended for clinics that have purchased an UltraMIST System within the last year and are open to multiple current and potential users within each clinic.

The forum in Fresno, California was attended by approximately 20 clinicians in 6 different clinics. Our aim with these forums is to ensure that the entire team at the clinic is well-versed in the use of UltraMIST and understands its clinical and economic benefits, promoting broader adoption and increased utilization within the clinic.

The feedback that we received from our Fresno forum was so positive that we've gone ahead and planned and host 2 new user forums during the fourth quarter of this year.

So with that, let me hand the call back over to Dave.

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [4]

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Great. Thanks, Brad. So with another quarter of traction and commercial progress in our target markets, we continue to believe we are pursuing the appropriate sale strategy to drive adoption of our regenerative technologies and fuel our sales growth.

In addition to our sales performance during the third quarter, we were able to reduce our cash burn from operations and improve our adjusted EBITDA by $2.1 million or 53% year-over-year.

We also secured additional non-dilutive capital to improve our balance sheet condition.

During the quarter, we received $3.4 million in exchange for the sale of our TheraBond product line.

The existence of TheraBond in our product portfolio was just not consistent with our organization's new strategic focus on regenerative technologies in recent years.

As with our SORBION franchise, we chose to streamline our portfolio by selling TheraBond, which enabled us to raise incremental capital to support our operations and reduce our debt obligation.

This transaction also further allows our sales force to focus our efforts on our regenerative product portfolio.

Second, it's also important to note, that in conjunction with the sale of TheraBond, our lender has agreed to postpone our principal payment obligations until the beginning of 2018.

Third, we were able to reduce our third quarter cash burn from operations to $1.8 million, representing a decrease of approximately 50% compared to both the second quarter of 2017 and the third quarter of last year. And lastly, on October 27, we received $1 million that was owed to us from Soluble Systems. This is cash we've received in October, it is not reflected in our third quarter cash balance that you will see.

With all of the recent progress in mind, I want to reiterate to all of our shareholders that we remain focused on exploring every available strategy to improve our balance sheet and secure the necessary capital to support the continued pursuit of our growth opportunities.

In tandem with this strategy, as we announced in the separate press release this morning, we have also begun to systematically explore and review potential strategic alternatives.

We have engaged Cowen as an independent adviser to assist us in this process. Importantly, we are pursuing both of these strategies simultaneously. Think of it as a parallel path with the goal of maximizing shareholder value.

With that, let me now turn the call over to Brian for a detailed review of our third quarter financial results as well as our 2017 guidance. Brian?

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Brian M. Posner, Alliqua BioMedical, Inc. - CFO, Principal Accounting Officer, Treasurer and Secretary [5]

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Thanks, Dave, and good morning, everyone.

Total revenue for the third quarter of 2017 increased $526,000 or 12% year-over-year to $4.9 million. Total revenue for the third quarters of 2017 and 2016 exclude $346,000 and $499,000 respectively of revenue from sales of TheraBond products, which are recorded as discontinued operations following the sale of the product franchise.

Revenue from sales of the Company's current products increased $550,000 or 14% year-over-year to $4.4 million.

Product revenue growth was driven by sales of our Biologics products, Biovance and Interfyl, which increased 70% year-over-year, along with sales of UltraMIST Systems.

Product revenue represented 90% of our total revenue this quarter compared to 88% of total revenue in the third quarter of '16.

Revenue from our contract manufacturing business decreased $24,000 or 5% year-over-year to $495,000 in the third quarter, consistent with our expectations.

Gross profit from continuing operations for the third quarter increased $596,000 or 22% year-over-year to $3.4 million, representing 69% of sales this year compared to 63% of sales last year.

The increase in gross profit was driven by the growth in product sales, which comprise a greater portion of our revenue this year compared to the prior year period.

Gross profit margin on product sales was approximately 77% in the third quarter of '17 compared to 76% last year.

Operating expenses decreased 33% year-over-year to $7.2 million in the third quarter of 2017, driven primarily by $1.5 million decrease in SG&A expenses.

Operating expenses in the prior year period also included a $1 million milestone related to the Company's licensing agreement for its Biologic products and $715,000 of acquisition-related expenses, which did not recur during the third quarter of 2017.

GAAP loss from operations for the third quarter of 2017 improved to $3.8 million compared to a loss of $7.9 million in the same quarter last year.

In thinking about our year-over-year performance over the first 9 months of 2017, we believe it's important to highlight the following takeaways: one, we have reduced our cash operating expenses, which include our SG&A and R&D expenses, by approximately $4 million or 40% over the first 9 months of 2017; two, our non-GAAP net loss from continuing operations has improved approximately $5.5 million or 29% year-over-year, over the first 9 months of 2017; three, our adjusted EBITDA loss from continuing operations has improved by $6.4 million or 46% year-over-year over the first 9 months of 2017.

As a reminder, we have included a full reconciliation of our non-GAAP net income and our adjusted EBITDA loss from continuing operations in our earnings release.

We believe these measures more accurately reflect our performance given the multiple noncash and nonrecurring items that impact our reported results.

Now turning to the balance sheet. As of September 30, 2017, the Company had cash and cash equivalents of approximately $2.1 million compared to $5.6 million on December 31, 2016.

The $3.5 million decrease in cash over the first 9 months of 2017 was driven by cash outflows of approximately $9.8 million from operating activities; Cash outflows of approximately $3 million from nonoperating activities, primarily related to the repayment of a portion of our long-term debt, payments associated with our acquisition of Celleration, and a bridge loan to Soluble Systems; cash inflows of approximately $9.3 million from our private placement, our public offering of common stock, and the sale of our TheraBond products, we continue to expect our cash burn from operations to approximate $12 million for the full year 2017 period, which represents a 34% decline in cash used in operations year-over-year.

On August 31, in connection with the sale of our TheraBond product line, our lender agreed to defer our principal payments due under our credit agreement until January 31, 2018.

Subsequent to the end of the third quarter, on October 27, we received $1 million from Soluble Systems in connection with amounts advanced to Soluble in 2016 and 2017.

Turning to our financial guidance. As communicated in our earnings release this morning, we are increasing our financial outlook for the fiscal year ending December 31, 2017. The Company now expects total revenue of $19.3 million to $19.8 million, which represents year-over-year growth of approximately 18% to 22% compared to total revenue of $16.3 million in 2016.

Our total revenue guidance assumes the following revenue growth trends: product sales of $17.4 million to $17.9 million, representing growth in the range of approximately 23% to 27% year-over-year compared to product sales of $14.1 million in fiscal year '16; contract manufacturing sales of approximately $1.9 million compared to $2.2 million in fiscal year 2016.

For modeling purposes for the fiscal year 2017 period, we expect gross margins remaining in the mid-60% range, and operating expenses, excluding noncash items to be below $6 million per quarter.

With that, I'll turn the call back to Dave. Dave?

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [6]

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Thanks, Brian. Okay, so to summarize. We are increasing our 2017 guidance based upon the strong revenue performance that we have achieved so far this year, which continues to validate that we are pursuing the correct sales strategy for our regenerative technologies.

In 2017, we have also made important changes to minimize our operating cash burn while waiving over $9 million in capital to support our operations.

As we enter into the fourth quarter, we remain committed to bringing 2017 to a strong close by really doing 3 things. First, driving products growth through strong sales of our Biologics with contributions from our UltraMIST franchises. Second, maximizing our peer-to-peer engagement initiatives. And finally, third, enhancing our portfolio of clinical support for our Biologics products.

Our confidence in our future success is further supported by a number of recent and upcoming developments that I'm excited to announce on today's call.

First, earlier this month, we received news that the reimbursement rate for UltraMIST Therapy within our target market segment, the hospital outpatient department is going to increase materially in 2018 providing a further tailwind for our efforts to promote adoption.

And second, on the clinical front, we have 2 important studies that have been accepted for publication in prominent medical journals.

Lastly, in addition to pursuing our growth strategy, we will continue to focus on maximizing shareholder value in the long-term by exploring all potential options to strengthen our balance sheet while simultaneously evaluating potential strategic alternatives.

With that, thanks everyone for joining us on the call today, and for your interest in Alliqua.

With that operator, let's open the phones up for a Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Josh Jennings with Cowen and Company.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [2]

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I was hoping that you would start with the sales force. I mean, another strong product quarter but I just wanted to see where you were, what inning you are in, in terms of the evolution of the hybrid sales force? Are you -- is the mix between direct and independent sales agents where you want it to be? And how do you see that progressing over the next 6 to 12 months?

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [3]

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So listen, I think we're very excited, maybe the wrong word. I think it just progresses the way we have planned this out. So you may remember in Q4 of '16, we had 56 selling resources and then in Q2, '17, we had 65 selling resources and today, we have 82 selling resources. So the trend in this independent expansion has worked out very well. All of this by keeping our direct resources at the same levels that they have been all months. So number one, it's progressing exactly the way we had hoped. Number two, we're starting to see more and more contribution from this independent group. I would think as we move forward, from a volume standpoint, this 82 number will probably go up but maybe not at the same magnitude moving forward. What it maybe is that the number doesn't come up but the people within it change a little bit. I think you find with 1,099 independent agents, some just don't produce what you hoped and we give them kind of a 6-month window and if it's just not happening, we make a change and we bring someone else in. So I would say that we are in inning number 4 as far as the evolution of our hybrid sales force. Brad?

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Bradford C. Barton, Alliqua BioMedical, Inc. - COO [4]

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The only thing I would add Dave would be that -- we strategically use it to help expand our coverage in what I would call the gray areas of the United States. Areas where we don't have direct coverage. And so we opportunistically -- we look to see if we can't get coverage in some of those areas through an independent effort. So yes.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [5]

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Great. And I wanted to just follow up on the Biologics franchise and strong growth, 70% in the quarter off of a tough comp. It seems like both Interfyl and Biovance are chugging along -- but is that correct? Is there any differences? One outperforming the other, or any kind of color between those 2 product lines on the Biologics side would be helpful?

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [6]

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Yes. Absolutely. Well, first of all, we continue to be really encouraged by the Biologics franchise in total. Biovance, of course, has been on the market much longer and it continues to have some tremendous traction in the marketplace but over these last 2 quarters, remember, Interfyl was launched approximately a year ago, kind of the start of the fourth quarter last year and we really like the trends we're seeing in Interfyl as well. So we are truly getting a contribution from both of these products to make this Biologics franchise pretty darn robust right now, Josh.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [7]

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Excellent. And just on UltraMIST. It sounds like system sales were strong. Any commentary on utilization? I mean the reimbursement rate increase that you've mentioned Dave, sounds like that's going to help drive the utilization rate but you've had a lot of UltraMIST summits. You have the Center of Excellence in Boston. It sounds like you're on the cusp of kind of also driving utilization. But any comments on the utilization rate on top of the strong system sales that you reported for UltraMIST would be great?

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [8]

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Yes. So I think it's too early to really evaluate this new strategy that we're putting on UltraMIST a couple of quarters ago. We like the progress of it, to the point I think both these new user forums and the physician summits have been exceptional successes. This new reimbursement rate was somewhat of a surprise. I think it continues to validate the clinical outcomes that the UltraMIST and the MIST Systems are getting. Remember Josh, that does not go into effect until January 1, 2018. And then to your point, clearly, this is a razor and razor blade situation. The more razors we get out there, the utilization of those razors will increase the razor blade. So a little too early to tell as far as the exact adoption rate but we like what we see. Do you have anything to add...

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Bradford C. Barton, Alliqua BioMedical, Inc. - COO [9]

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I think you said that well, Dave. I think we're optimistic given that we know we're doing the right things to drive both the interest and awareness. A lot of the things that we're doing from a marketing perspective are really driving folks to evaluations and those evaluations are turning into adoptions. So we're very optimistic about it. I would say the other thing is we're seeing kind of a positive sign in the HOPD. We're pleased because that's where we're focusing most of our attention. And remember, that means that some of the other segments that were declining, well we're letting those decline because the focus and the opportunity is in the HOPD segment.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [10]

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All right. My last question, Dave, you mentioned 2 clinical papers that are going to be published in medical journals. Any more details on which product lines they will be on? And any timing?

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [11]

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I don't want to say too much here, Josh. But I'll save that one of them is actually in the UltraMIST franchise and one of them is in our Biologics franchise. We're excited about both of them. We think that both of them will have -- will create a tailwind for us. But that's probably all I can say at this point. Timing wise, by year-end. I think we should see both of these published.

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Operator [12]

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The next question from Swayampakula Ramakanth with H.C. Wainwright.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD & Senior Healthcare Analyst [13]

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A couple of quick questions. So one of the things which, I remember, Dave and your team have been really working hard is on the operational efficacy. And that has been doing really well over the last -- at least the last couple of quarters or more. So what else could the management do or what has worked so far? And what else do you need to do, so that you not only maintain the space but try to improve upon?

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [14]

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So thanks, RK, for the first question. So you're right. I think we have taken a really strong look at the operation here. Really, a year ago, remember, I mean, people forget. We're 3 years old. And so after 1.5 years, we really had a chance to look at the organization, really understand what our target of strategic focus was and make the more targeted decisions in our spend. And that's really been the key here. It started with targeting the strategies, which have the greatest ROI. And I think a great example of that would be the Bioskills lab and the physician summits that, that Brad, I think, mentioned in his prepared remarks. Almost 2/3 adoption rate in these type of venues. So we have stopped doing many other things that have expanded those kind of targeted spends. Of course, the hybrid sales force has really helped us as well. This is a pay-as-you-play type of business model. So rather than bringing on more fixed expenses, we're spending only commissioned dollars as we continue to be successful. And then finally, just looking at doing things differently, rather than doing it the way things have always been done. Maybe we don't need something or we can find a way to do it differently or we provide opportunities internally for people to expand their scope of responsibilities. So it's really been those 3 things that we've been able to bring the operational efficiency up to where it is today. Going forward, I think it continues to be the same things, while it will hit each, every one of them just a little differently, ensure that we have the right targeted spend, ensure that we continue to drive greater efficiency in this hybrid sales force. We're in the early stages. You know I answered Josh's question, what inning and I would say the fourth inning, I like where we're going but the capabilities of this hybrid sales force, specifically the independent agents and making sure their productivity levels increase, those will be key areas to continue to drive this business forward. So I think there is still an awful lot we can do. I guess, I'll finish off by saying we need to continue to drive sales force effectiveness. Both with our current products, with some potential new products internally that we would envision bringing out and then continuing to look at non-dilutive ways to get our hands on some additional products, so that there's more dollars in each bag. And I think if we continue to move down under those 4 hospice, we'll continue to drive good growth but at the same time, strong operational efficiencies.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD & Senior Healthcare Analyst [15]

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Then the next question is on the Biologics portfolio, I know you talked a little bit about that with Josh's question. But my question is basically around 2 things. One is, certainly, Biovance and Interfyl are doing great. But what are the pushes and pulls on that portfolio to continue to ramp up that growth rate? And at the same time, as the revenues are increasing, what sort of an impact does that have on your COGS in the sense that volume increases? Could you improve on your COGS line as well? Or that is something you need to watch out?

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [16]

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So to my earlier point. First of all, we continue to be very happy with where we're going. And let's put this into perspective. We're still very small. But we love our growth. I think we have to put this into perspective. Both of the markets, which we address -- both our surgical market and into the targeted area within that surgical market and the chronic wound market in HOPD for our Biologics franchise, we still represent a very small percentage. And so number one, the world is our oyster in our ability to continue to grow in this market. And having really strong products, efficacy around those products continue to build data to support that efficacy, continue to drive our hybrid sales force is specifically in the surgical space, it really does allow us to continue to grow this for the foreseeable future in a really positive way. And then add maybe another product that we put into the bag in the middle of 2018. Now you're really starting to see some penetration in the market. And so number one, I think this ability to continue to grow at these rates has some really nice run rate ahead of it. As far as whether that volume drives cost down, remember, this is a product that we license. So our ability to control COGS is a little less than it would be in something like an UltraMIST where we control start to finish the entire supply chain cycle. We have a very good margin today. We pay a royalty on top of that. So RK, we're limited in the levers that we can utilize to drive cost down in our Biologics franchise quite frankly, but we're very satisfied as to where we are as we speak today.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD & Senior Healthcare Analyst [17]

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Great. The last question. This is on the current revenue guidance, which obviously, is an incremental of what you had said last quarter. Also looking into it, looks like you have a little bit more visibility into your contract manufacturing ware -- that is an increased number compared to last time. Is this a gain of a onetime contract at this point? Or do you see some growth in that segment of your revenue line?

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [18]

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Thanks, RK, for all of your questions. Brian, why don't I let you handle that one?

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Brian M. Posner, Alliqua BioMedical, Inc. - CFO, Principal Accounting Officer, Treasurer and Secretary [19]

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Thanks, Dave. So basically, we have an order stream for the fourth quarter from our biggest customer in contract manufacturing. I wouldn't extrapolate that necessarily into '18 but we're comfortable, obviously, with the number for Q4 of '17.

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [20]

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I think that's right, RK.

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Operator [21]

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And we'll take our next question from Suraj Kalia with Northland Securities.

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Suraj Kalia, Northland Capital Markets, Research Division - MD & Senior Research Analyst [22]

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So Dave, the 82 selling grafts direct, indirect, I presume the strategy of going after the 1,099 people is driven more by a desire to contain cost? Or is it because of lack of full-time qualified employees? And also to what percent of these 1,099 have matched your expectations?

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [23]

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Yes. A really good question, Suraj. So first of all, I'm actually a believer that in a small company, a hybrid approach to selling -- and I want to define this very clearly, Suraj. In the surgical space and, specifically, at the orthopedic surgical space because as many of you who know that space well know, this is just an accepted way to create a distribution channel in this space. So in a smaller company where, unlike a Medtronic who have thousands of salespeople, the ability to have a key direct sales organization in some of your key urban areas where you have the largest opportunity augment that with independence, really important around independence. To Brad's point its an area, it would take us take years to justify direct expenses there. But our key criteria is that somebody comes in with a relationship, a preexisting relationship where they have credibility, respect from the physician community and immediately can take a really good product backed up by tremendous clinical efficacy, you match those 2 and we can have some immediate success. Sometimes, it's in one hospital system. Sometimes it's with one surgeon and sometimes it's in a larger geographical area. And it could be all of those different things. In regard to what the productivity is as a percentage of these, I think we're a little too early to tell that. I will tell you this, that all 1,099 as well as you can screen them are not all made the same. And so I don't know what the number is yet and I think if I threw one out, it would be disingenuous at this stage, Suraj, but we continue to work with the 1,099s and continue to try and nurture their development, get them up to speed quickly so that they can leverage these relationships that did bring in. Suraj, I know I avoided your question a little bit but I just think it's a little too early for us to tell what that right number is.

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Suraj Kalia, Northland Capital Markets, Research Division - MD & Senior Research Analyst [24]

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Fair enough. And Dave, what was the call point for Interfyl versus Biovance, how is that shaping up?

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [25]

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It's generally the same. I mean, I think what Interfyl does for us, Suraj, today, we remain very focused on the specialty surgical segments that we have been focused on in the past. Two, the one thing that Interfyl allows us, however, is it's a larger opportunity to expand the indications that maybe Biovance had. So here's an example, I mean, think of Interfyl. Interfyl can be used wherever there could potentially be soft tissue damage, right. So that could be in any kind of surgical intervention and we can see these vertical opportunities of indication continuing to increase over time. So while we're focused on where we are today and selling into the same call point as Biovance, we see some tremendous opportunities probably more than Biovance for expansion into new indications with Interfyl moving forward.

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Suraj Kalia, Northland Capital Markets, Research Division - MD & Senior Research Analyst [26]

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That's fair enough. And Dave, 2 last questions, and I'll hop back in the queue. More on the macro side, David. Look, if you choose not to answer, I could -- if you do, I appreciate that. A big-part question. Just wondered, we all know there is a gray, shady marketing practices in the space of supplies and such. I don't think that's any secret. Can you characterize how you guys follow a difficult playbook? How does that impact you given what others are doing in the place? I'll just state it otherwise. You know what? If we start doing the way others are doing, we could be growing whatever. I'd love to get some color on that, if you could. The second thing, Dave, just out of curiosity, are you seeing any pushback rationing or a restriction of products, skin grafts, especially in Biologics, from the Medicare Advantage side? And this is more at a macro level.

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [27]

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Thanks, Suraj. Suraj, here is the only thing I'm going to say about your question number one. I couldn't be more proud of the employees that we have who work for Alliqua, the compliance policies that we have put into place and the integrity in which we operate in the marketplace. I'm proud to be a part of an organization that operates under that operational umbrella and I just can't speak to what others do in the marketplace. So that's probably all I'll say on that. I'm going to maybe get Brad to help me out or Nino on this one as well. I personally have not heard of any restrictions around the Medicare Advantage for skin allografts. Listen, pre-authorization, continuing to educate the payer community remains a major challenge for all of us when physicians are trying to use any kind of Biologics product. But that specific question, I'm not sure I've heard anything. Nino?

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Pellegrino Pionati, Alliqua BioMedical, Inc. - Chief Strategy & Marketing Officer [28]

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Well, I do -- listen, there is more work required in order to get a Medicare Advantage. And we've got 100 -- well, we will have next year, everyone will most likely have a 100% coverage from a math perspective. But a lot of the Medicare beneficiaries -- not a lot, a small portion of them are covered by Medicare Advantage as well. And in those cases, as Dave mentioned, Suraj, we had a service like most other organizations have that help our customers through a pre-authorization or benefit verification. And we make sure that whatever documentation is required to support medical necessity is put in place. So I don't see it as a major issue. It is, if you will, more of an effort. But that's the way I would characterize it.

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [29]

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And Suraj, just to finish off the answer. On a real macro basis, I don't think it's any more so today than it was a year ago or 2 years ago. So if you think of macro trends, I don't believe that trend has gone worse or better. I just think it has remained pretty consistent over these last couple of years.

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Operator [30]

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(Operator Instructions) And it looks like we have no further questions. So I would like to turn it back over to our speakers for any additional or closing remarks.

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David Ian Johnson, Alliqua BioMedical, Inc. - CEO, President, Director and Executive Chairman of Aquamed Technologies Inc [31]

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Alright. Well listen, I just want to start by thanking everyone for your time today. Listen, we continue to remain bullish on the Alliqua BioMedical story and we hope you do too. We look forward to continuing to provide further updates as we move forward. Thanks, everybody for spending time with us this morning. Thanks, operator.

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Operator [32]

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You're welcome, sir. That does concludes today's conference. We thank everyone again for their participation.